What is principled reasoning?
This is an alternative way of assessing risk. It’s based on the idea of honouring fundamental principles of human flourishing, rather than the most common methods of portfolio risk assessment which are normally based on variability or volatility.
Where have you heard of principled reasoning?
It’s been put forward by economists in the US as an alternative to modern portfolio theory, also known as mean-variance analysis. Modern portfolio theory was introduced in 1952 by the economist Harry Markowitz, who was later awarded a Nobel Prize in economics.
What you need to know about principled reasoning.
It was created by economists including Jerry Bowyer at the Ronald Blue & Co Investment Policy Committee in the US. Bowyer was also previously the executive director of the National Reform Association, which is closely linked to the Reformed Presbyterian Church of North America. Principled reasoning states that when a country violates certain principles, it adds risk to its investments which then require higher risk premiums to compensate. The theory is based on the idea that communities which honour cultural, legal and economic principles have a more stable foundation and are likely to have a lower level of risk.
Find out more about principled reasoning.
To learn more about risk assessment, check out our guide to market risk.